Bankruptcy

Debit Cards Cause Overdrafts

By Richard K. Gustafson

The Center of Responsible Lending recently published a new study called “Debit Card Danger” that revealed most overdrafts are not caused by checks anymore. They are caused by debit card usage. This isn’t surprising as most people don’t make entries into their check registers every time they use their debit card. In fact, most people don’t even save the receipt.

Banks have routinely approved debit card transactions that overdraft a bank account. Instead of refusing the transaction, banks accept the transaction and charge hefty overdraft fees to their customers. The bank acts like it’s doing you a favor by calling the fee a “courtesy overdraft.” Banks collected overdraft fees of approximately $10 billion in 2005! 38% of overdrafts were caused by debit card transactions. Paper checks accounted for 27% of overdrafts and online payments accounted for another 27% of overdrafts.

The irony here is that most people believe that if there are not sufficient funds in their accounts to cover a transaction, that the bank would deny the transaction. A lot of people, therefore, assume they are overdrafting their account when the debit card transaction is approved.

These “courtesy overdrafts” are essentially expensive, short-term loans. Banks started doing this several years ago, but no one is really sure when. The median transaction amount that causes an overdraft is $14.75. Since the average overdraft fee is more than double this amount and since most people pay the overdraft fee within 3-5 days, these “courtesy overdrafts” have an effective interest rate of 20,000%! Why do banks allow these transactions to occur? Money! Financial institutions that adopt these “courtesy overdraft” programs can expect their overdraft revenue to increase from 200-400%!

All of this would be fine, in my opinion, if consumers knew this was happening. According to the study, 61% of consumers asked preferred that the bank reject transactions if the transaction would cause an overdraft.

The best way for consumers to protect themselves from these “courtesy overdrafts” is to link the checking account with a savings account or a credit card. Essentially “overdraft protection.” Fees still apply to these transactions, but the fees for accessing the overdraft protection are a fraction of the average $30 insufficient funds fees banks charge for overdrafts. The bottom line is that consumers need to be more responsible than they have realized in keeping up with the balances in their checking accounts to prevent incurring overdraft fees. At the very least, consumers should take advantage of “overdraft protection” to avoid the big fees.

Full post as published by Consumer Bankruptcy Blog from Legal Helpers on February 08, 2007 (boomark / email).